Auditor Audit Case Study

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Lack of Auditor Independence
Background
In response to the famous Enron accounting scandal, which resulted in dissolution of the company and its auditing firm Arthur Anderson, for overstated income by intentionally understating liabilities and concealing debt through special purpose entities, while Arthur Anderson was found guilty for destroying evidence that tied the firm to its audit of Enron, the SEC (2002) designed a rules to ensure that auditors are independent of their audit client and the Sarbanes-Oxley (SOX) Act of 2002 mandates that audit committees be responsible for the oversight of the engagement of the company’s independent auditor. However, the growing concern of the lack of auditor’s independence still remains. The SEC’s general …show more content…

Fiolleau et al. mentioned that the regulatory reforms positioned the audit committee as client and held them responsible on auditor appointment process, however the investigation suggest that the management has significant influence or control over the decision making process of selecting an auditor instead, and the role of the audit committee was interpreted as a monitor to auditor selection process and did not take the full responsibility in gathering the information and the selection decision (pp.874-877). Fiolleau et al. study result shows that the RFP was drafted by the CFO with an evaluative criteria indicating the disqualification if the auditors contact the audit committee members except the chair, and appointing the VP-finance as a single point of contact, and sent to the auditor with audit committee approval, which is opposite to the AICPA (2004) recommendation to have the audit committee issue the RFP with the management signature (p.874). Fiolleau et al. study discovered that during deliberations, no meeting without the management presence, while during the evaluation process the management met without the audit committee and then provided their recommendation to the audit committee afterwards, which is not the best practice because the corporate governance recommendation is for the board to deliberate in a video conference settings (p.876). Fiolleau et al. specified that regulatory reforms assigned audit committee as decision maker to appoint external auditor to promote independence of auditors from their clients and dictate audit partner rotation to institute as another set of eyes or fresh look, however

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